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Title | Market expectation shifts in option-implied volatilities in the US and UK stock markets during the Brexit vote |
Authors |
Bielykh, A.
Pysarenko, S. Dong Meng, Ren Kubatko, Oleksandr Vasylovych ![]() |
ORCID |
http://orcid.org/0000-0001-6396-5772 |
Keywords |
Brexit referendum financial modeling option-implied volatilities stock exchange |
Type | Article |
Date of Issue | 2021 |
URI | https://essuir.sumdu.edu.ua/handle/123456789/87642 |
Publisher | LLC “Consulting Publishing Company “Business Perspectives” |
License | Creative Commons Attribution 4.0 International License |
Citation | Artem Bielykh, Sergiy Pysarenko, Dong Meng Ren and Oleksandr Kubatko (2021). Market expectation shifts in option-implied volatilities in the US and UK stock markets during the Brexit vote. Investment Management and Financial Innovations, 18(4), 366-379. doi:10.21511/imfi.18(4).2021.30 |
Abstract |
This paper investigates the effect of the Brexit vote on the connection between UK
stock market expectations and US stock market returns. To gauge UK stock market
expectations, the option-implied volatilities of the FTSE 100 index are calculated in the
period starting five months before and ending four months after the Brexit referendum.
To keep the analysis “clean”, it stops right before the 2016 US presidential elections. It
uses an OLS regression to estimate the change in the relationship between US and UK
stock market expectations.
The main findings show that the US and UK stock markets became somewhat less integrated four months after the Brexit referendum compared to the five months before it.
The S&P 500 Index returns have a statistically significant impact on implied volatilities
of the FTSE 100 only before the Brexit referendum. However, the British risk-free rate
(LIBOR) became a statistically significant factor affecting FTSE 100 implied volatilities
only after Brexit. This analysis may be used by decision-makers in the money management industry to act appropriately during Black Swan events. When UK citizens
unexpectedly voted in favor of Brexit, the risk-free rate dropped, making it cheaper
to invest, increasing the Sharpe ratios of equity portfolios. Coupled with increased
uncertainty, this caused portfolio reallocations. In turn, expected volatility measured
by options-implied volatility increased. |
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File | Size | Format | Downloads |
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Bielykh_et_al_Market _2021.pdf | 575,22 kB | Adobe PDF | -478905670 |
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